How to plan your first property investment
Once you have purchased a home and built equity by paying the mortgage and allowing the property to grow in value, it is time to consider what to do with the equity you have earned.
A popular way to leverage the difference between the money you owe on your mortgage and the amount your house is worth is to purchase an investment property.
This means adding to your mortgage, however the idea is that a tenant will pay the lion’s share of the cost of your investment. There are also tax breaks that minimise the financial impact of having a second, third or subsequent home in your property portfolio.
The ideal result is that you grow your wealth with minimal financial outlay. This leads to the luxury of choice, either to retire sooner or fund the lifestyle you desire.
It does take some groundwork to get started as an investor. Here are the steps, as recommended by the team at BFP Property.
Step 1: Know your numbers
To figure out how much equity can be put towards an additional loan, you require some knowledge of how lending works.
This is where your mortgage broker is an essential contact. Armed with details about your income, property value and debts, they will contact lenders to see how much you can borrow. They will also talk to you about borrowing options, such as an interest-only vs a principal & interest loan.
Moving forward with a new loan will take some time. You need proof of employment or income, identification and evidence of your monthly outgoings. Be methodical and calm throughout this process and you’ll make your way towards approval of additional finance to fund the purchase of an investment property.
Step 2: Meet with your accountant
Loopholes and tax breaks mean you can reduce the monthly cost of your investment property. Your accountant will help you put the correct structures in place to do this. Talk to them about what’s possible, what’s legal and which tax breaks relate to your circumstances.
Step 3: Engage a conveyancer
A conveyancer is a solicitor who works with the transfer of property ownership. They will help with the exchange of contracts and can also share helpful advice as you navigate the waters of property investment.
Step 4: Start your research
Not all suburbs are created equal and the property market is known for rising and falling.
Consider Perth, where the mining boom of 2000-2010 caused property prices to triple. Cashed-up miners paid huge prices for their homes – and then the bubble burst. Local prices dropped then flatlined as people left the state in droves.
Do your research to identify areas that are set to boom, not nosedive. It can help to have the advice of a buyers agent who has access to data which isn’t available to the general public.
Step 5: Shortlist your properties
When you buy your first property or ‘forever home’, it is easy to choose with your heart. Those leaky pipes can be overlooked for your dream location or outlook.
As an investor, you need to shop with your head. Create a shortlist of areas and properties, and compare like with like so you can understand market value.
Step 6. Negotiate
The less you pay for a property in a strong growth area, the better your returns will be. Again, you don’t have to be a desperate buyer when investing. With time on your side, you can negotiate based on facts, not emotion.
Some people can’t help but get emotionally involved when they bid for property. If you feel at risk of this, engage a buyers agent to take the stress out of the experience.
Step 7. Appoint a property manager to look after your investment
As well as an accountant to show you how to minimise the expense of your purchase, you need a property manager to help you take care of it.
A good property manager will find reliable, long-term tenants who will take care of your investment. For a small fee, they will make sure it is compliant with safety and tenancy laws. Your property manager should also be able to provide advice about how to maximise the value of your property so you can charge a premium rent.
Avoiding the property investment pitfalls
Skipping any of these steps or applying the wrong strategy can set your investment property’s income back dramatically.
To optimise your chances of success, you need the right team behind you. This includes your mortgage broker, accountant and conveyancer as mentioned. It also makes a great deal of sense to work with a Buyers Agent who can walk you through the process, help you avoid mistakes and show you which properties and areas are worth focusing on.
Find out more: Seven reasons a buyers agent will pay for themselves
To be a successful investor, you need two more things:
- Action: Quit procrastinating. Put a plan in place, do your due diligence and get on with it!
- Patience: Delayed gratification is key. If you have bought well, property growth will come in time.
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